Creating A Practice Budget: How Much Do I Tell My Staff?
Paul Endry, OD writes:
One of your blogs suggested that ODs create a practice budget so the doctor knows how much he is spending. What budget items do you recommend sharing with the staff?
Jerry Hayes, OD responds:
Good question.
Every OD Has 8 Major Budget Categories
As the owner of a traditional dispensing practice, you should be focused on 8 major budget categories. (The percentages indicate the recommended ranges you should spend as a percent of collected gross income.)
1. Cost Of Goods Sold* 27 - 33%
2. Non OD Staff Salaries And Benefits 15 - 22%
3. Occupancy Costs 4 - 8%
4. Patient Care Costs And Equipment 3 - 5%
5. Marketing And Promotion 1 - 2%
6. General Office Overhead* 6 - 9%
7. Net Income 30 - 35%
8. Gross Income* 100%
Out of these 8 budget items, there are three* that I strongly suggest you not just share with your staff, but base some portion of their bonus or annual raise on achieving.
2. Cost Of Goods Sold: This is your single biggest expense and staff members are usually the ones who do the ordering and manage the inventory.
3. General Office Overhead: This includes supply items from paperclips to stationery. You want them to have a clear idea of what they should spend.
You Get What You Reward
There is an old management axiom that says, “You get what you reward”. I believe that when it comes to setting performance objectives for your team.
I guarantee you will have their attention if you use the next compensation meeting or performance review as an opportunity to inform your staff members that their 2009 bonus will be based on meeting budget objectives.
Setting Budget Goals For Your Staff
Here’s one way to do it. Let’s say that you grossed $500,000 in 2008 and expect to increase that by 4% to $520,000. You have to develop your own numbers, of course.
After spending some time analyzing your practice expenses, you find that your Cost Of Goods were 34% of gross, but you think 32% is very doable in your practice. And, General Office Overhead was 7%, which you are satisfied with.
Be Realistic
From a practical standpoint, you need to do this exercise in concert with one or more key staff members. You must have their buy-in for this approach to work. The last thing you want to do is present unrealistic goals that nobody, including you, believes in.
At this point, let’s assume you have stretch goals that you and your staff are comfortable with. By that, I mean your entire team has to work to achieve these budget results, but they are achievable.
Make Your Staff Responsible
You can now tell your staff that you are bringing them into the ‘inner circle’. You are going to base their bonus, raise, special perk, whatever you decide, on achieving three financial objectives in your practice for 2009:
- Collected Gross Income of $520,000
- Cost Of Goods Sold will be 32% or less of Collected Gross
- General Office Overhead will be 7% or less of Collected Gross
A Bonus Idea
Some doctors earmark 1% of the gross for staff bonuses which I find to be about the right amount. In this case, all participating employees would split $5,200 ($520,000 x 1%) if the practice grossed $520,000 with COG of 32% and GOO of 7%.
If you take this approach, I recommend breaking it into quarterly goals instead of annual. It's easier for your staff to get excited over something they know is coming in 3 months instead of 12. Use the same percentages and base the 4% growth in revenue over the same three month period for 2008.
What if you don’t hit all three objectives? Consider giving them 50% of the full bonus for hitting two and something very modest if you only hit one.
Get Everybody Pulling In The Same Direction
Expect this announcement to scare your staff a little and raise a lot of questions. However, once a good staff understands the ‘what’, they will be energized to figure out the ‘how’.
And that is what you want, everybody in the practice working hard to increase revenues and hold down costs.
Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.
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Thanks for outlining the 8
Thanks for outlining the 8 major catagories. Since my practice is an s-corp and I do recieve a salary where does my income belong? Does it go in the staff salaries catagory or net income?
All OD salaries and bonuses
All OD salaries and bonuses go in the Net Income category.
In this case staff refers to Non OD staff only.